Many New Zealanders own their family home or bach in a trust, for a variety of reasons.

A tax problem can arise where the family home property is developed or subdivided, and that property is owned by the trustees of a trust.

Where work is undertaken developing or subdividing land within ten years of its acquisition, and that work is considered to be more than minor, any gain made on sale will be taxable (section CB 12). There are stipulated exclusions, and one of the most often accessed is the residential land exclusion (section CB 17).

The residential land exclusion applies to the family home where the land is 4,500m2 or less, and there is no pattern of buying and selling.

However, where section CB 12 applies, the residential land exclusion is not available if the family home or bach is owned by the trustees of a trust.

For the section CB 17 exclusion to apply, the land must be occupied by the person or any member of their family living with them. A trust cannot physically occupy the land as its residence. Effectively, the exclusion can only apply if the land is owned by individuals who reside on the land.

In 1995 the associated persons definition was widened, and the Government also amended the family home exclusion (for persons associated with a dealer or developer of land) to include the sale of trust-owned family homes. However, they did not extend the amendment to include trust owned family homes where the trust itself develops or subdivides the family property.

Given that many advisers recommend trusts as purchasers of the family home, difficulties can arise if there is the potential for development or subdivision of the land in the future.

If the issue is identified prior to purchase, the better option may be to acquire the land in personal names, and to undertake any development or subdivision work whilst in personal names, and potentially transfer the land to trust at a later date.

If the residential land is already in a trust and the trustees are contemplating development work or a subdivision, there may be options they can take to ensure the section CB 17 exclusion applies, or for another exclusion such as the investment exclusion to apply. As ever, one should include consideration of the potential application of the anti-avoidance provisions to any transaction, and the risk of Inland Revenue taking an adverse view.

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